2015 (12) TMI 361 - AT - Income Tax

Tribunal directs AO/TPO on ALP, 10A deduction, and interest income

American Express (India) Pvt. Ltd. Versus DCIT, Circle-1 (1), New Delhi.

The Tribunal partly allowed the appeal, directing the AO/TPO to recompute the ALP of international transactions under Category-1, granting the deduction ... Transfer pricing adjustment - selection of comparables - Held that:- A company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. See Petro Araldite (P) Ltd. Vs. DCIT [2015 (3) TMI 1010 - ITAT MUMBAI]. In view of the fact that there was a merger by way of amalgamation during the year itself, we hold that Nucleus Netsoft and GIS (India) Ltd. cannot be considered as comparable due to this extraordinary financial event. Vishal Information Technology Ltd. - the assessee’s outsourcing cost is roughly 8%. This is an important factor which has its impact on the overall profitability of a company. Several Benches of the Tribunal across the board have unanimously held this factor to be a relevant one in deciding the question of exclusion of a particular company from the list of comparables. Copies of some of such orders expunging companies on this score have been placed by the ld. AR on record. In view of this different business model adopted by Vishal Information Technology Ltd. (now known as Coral Hub Ltd.) vis-à-vis the assessee, we order for the omission of this company from the list of comparables. Kirloskar Computer Services Limited (Seg.) and Mercury Outsourcing Management Ltd. - TPO is directed to include the operating profit/operating costs of the ITES segment of these companies in the final set of comparables, after due verification of the necessary figures for determination of their operating profit margin etc. benefit of deduction u/s 10A - Held that:- In the absence of any distinguishing feature having been brought to our notice by the ld. DR, respectfully following the precedent, we grant the benefit of deduction u/s 10A in respect of profits of AEGSC unit. Treating interest on short-term deposits as ‘Income from other sources’ and thereby denying the benefit of deduction u/s 10A/10B - Held that:- Tribunal has decided this issue in the assessee’s favour in earlier years by holding such interest on short-term deposits to be in the nature of `Business income’ and thereby eligible for the benefit of deduction u/s 10A/10B. Issues Involved:1. Transfer pricing adjustment of Rs. 28,30,09,294/-.2. Denial of deduction u/s 10A amounting to Rs. 36,31,98,760/-.3. Treatment of interest on short-term deposits amounting to Rs. 4,54,09,340/-.Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment of Rs. 28,30,09,294/-:The assessee, a wholly-owned subsidiary of American Express International Inc., USA, engaged in data management, information analysis, and control activities, reported 11 international transactions. The appeal concerns Category-1 transactions, which include export of data processing and back-office support, charges for CDN/CPU, charges for Global Max Software, secondment of personnel, relocation of expenses, and reimbursement of expenses. The assessee followed a 'Cost Plus' business model, charging associated enterprises (AEs) a 15% mark-up on total costs. The assessee used the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of Operating profit/Operating cost (OP/OC), initially selecting 13 comparables with a weighted average margin of 15.20%. The TPO, however, excluded certain companies and included others, resulting in a mean OP/OC of 30.71%, leading to a proposed adjustment of Rs. 5.41 crore, later reduced to Rs. 2.83 crore by the AO.The assessee contested the inclusion of Nucleus Netsoft and GIS (India) Ltd. and Vishal Information Technology Ltd., and the exclusion of Kirloskar Computer Services Limited and Mercury Outsourcing Management Ltd. The Tribunal found Nucleus Netsoft and GIS (India) Ltd. incomparable due to amalgamation during the year, which distorted financial results. Similarly, Vishal Information Technology Ltd. was excluded due to significant outsourcing costs (65.98% of total costs) compared to the assessee's 8%. Conversely, Kirloskar Computer Services Limited and Mercury Outsourcing Management Ltd. were directed to be included as their low turnover did not disqualify them from being comparables. The AO/TPO was directed to recompute the ALP of the international transactions under Category-1 in line with these observations.2. Denial of Deduction u/s 10A Amounting to Rs. 36,31,98,760/-:The assessee claimed a deduction u/s 10A for its AEGSC (STP) unit set up in the financial year 2002-03. The AO denied this on the grounds that the unit was set up after splitting up its existing business of FCE (EOU). The Tribunal noted that this issue had been recurring and had previously been decided in favor of the assessee. The DRP and the Tribunal in earlier years had accepted the assessee's claim for the benefit of section 10A. Following the precedent, the Tribunal granted the benefit of deduction u/s 10A for the profits of the AEGSC unit.3. Treatment of Interest on Short-term Deposits Amounting to Rs. 4,54,09,340/-:The AO treated the interest on short-term deposits as 'Income from other sources,' thereby denying the benefit of deduction u/s 10A/10B. The Tribunal noted that in earlier years, it had decided this issue in favor of the assessee, treating such interest as 'Business income' and thus eligible for deduction u/s 10A/10B. Respecting the precedent, the Tribunal allowed this ground of appeal.Conclusion:The appeal was partly allowed. The Tribunal directed the AO/TPO to recompute the ALP of the international transactions under Category-1, granted the benefit of deduction u/s 10A for the AEGSC unit, and treated the interest on short-term deposits as 'Business income' eligible for deduction u/s 10A/10B. The order was pronounced in the open court on 15.10.2015.